StreetAuthority Articles

This Biotech Stock Could Double

Ryan Fuhrmann — Fri, 10 Feb 2012 13:00:00 -0500

A key challenge in the pharmaceutical industry these days is the staggering amount of drugs losing their patent protection. Back in November 2011, Pfizer's (NYSE: PFE) Lipitor -- the company's all-time best-selling drug, which reported annual sales in excess of $10 billion at its peak -- lost its patent protection. In 2012, least branded drugs with $20 billion in 2011 sales will face competition from generic drugs.

The vast majority of pharma companies face significant headwinds to replace this lost revenue. With every loss of a drug that achieves more than $1 billion in annual sales, companies must find a new one just to stay even. For most in the industry, this has meant taking a step backward, which, in turn, requires two steps forward and multiple blockbuster releases just to have any chance at growing again.

With so many mature drug companies struggling to grow, it is refreshing to find younger companies not saddled with the wave of patent expirations. There are many such firms out there, but it is extremely difficult to say with certainty which of their compounds will successfully make it through the three mandatory stages of clinical trials. After all that, they still have to submit the new drug to the Food and Drug Administration (FDA) to receive market approval in the United States. This same process must be repeated in other countries to garner approval from their local regulatory agencies.

But there's a company that truly stands out, despite so many strenuous processes and harsh industry competition: Vertex Pharmaceutical (Nasdaq: VRTX).

First, Vertex doesn't have any drugs facing patent expiration. In fact, it recently launched what is quickly becoming the company's first blockbuster drug, Incivek. Remarkably, Incivek can help cure patients from the hepatitis C virus (HCV), which HCV can end up destroying the liver and even lead to cancer, if not treated. The drug was approved by the FDA in May 2011. By the end of December 2011, Vertex had quickly logged $951 million in Incivek sales. For 2012, projections are even better, with estimated sales between $1.5 billion and $1.7 billion.

There is huge potential for Incivek. About 170 million individuals across the world are chronically infected with HCV, according to the World Health Organization. Vertex sells the drug domestically and receives royalties from overseas sales, and with an estimated cost of around $49,000 for the entire treatment, there is the potential for Incivek to bring in tens of billions of dollars in annual revenue.

Finally, Vertex has another drug that recently received FDA approval. In early January, Kalydeco was approved to treat cystic fibrosis in the lungs, in one of the fastest approvals ever granted by the FDA, according to Vertex. The company hasn't provided any sales guidance for Kalydeco, but says it expects total operating expenses for 2012 of between $1.03 billion and $1.13 billion.

Analysts have put this into their models and currently anticipate earnings of $3.23 per share. This would be a significant achievement because it represents the first time Vertex will ever achieve positive and sustainable profitability.

Vertex also has other promising drugs in its pipeline that will target other treatments for cystic fibrosis as well as for rheumatoid arthritis, epilepsy and influenza. There are literally billions of dollars in potential revenue that Vertex is just starting to capture, so the sky is quite the limit.

Risks to Consider: Interestingly enough, overall market volatility and risk aversion on the part of investors has tempered the current share price performance of Vertex. Its stock is currently trading at $37, well below the level near $60 it experienced just as Incivek received FDA approval. But investors shouldn't be overly concerned about further price drops, because this has sent the forward price-to-earnings (P/E) multiple firmly into value territory at 11.5. This simply doesn't make sense for a company with Vertex's potential.

Action to Take --> It's difficult to model Vertex's future with complete certainty, but it is fair to assume sales and profits could grow at a 25% annual clip for many years to come. And with an earnings multiple so low, and that kind of growth, I think it's perfectly reasonable to expect this stock to double from current levels, up to about $80, within a couple of years. And with a couple of years of 25%-plus growth under its belt, the stock could take off even further.

-- Ryan Fuhrmann

Ryan Fuhrmann does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: Ryan Fuhrmann
This Biotech Stock Could Double

Whatever You Do, Don't Buy into this Emerging Market

Tim Begany — Fri, 10 Feb 2012 11:30:00 -0500

There's nothing like being burned by an investment, and those with money in emerging market stocks learned about it the hard way in 2011. As a group, emerging markets plunged nearly 19%, making them one of the worst-performing asset classes last year.

By no means should investors take this as a signal to avoid emerging markets, though. I firmly believe emerging markets will provide by far the best returns in coming years. They're already making an impressive comeback in 2012, jumping more than 14%, compared with about a 7% gain for the S&P 500.

However, there are individual emerging markets I think should be avoided because they're just not worth the risk. Markets like these are typically extremely volatile, even by emerging markets standards, and they can underperform, go nowhere or even lose you money for years on end. It can be difficult to escape them entirely, because most diversified emerging market mutual funds and exchange-traded funds (ETFs) provide at least some degree of exposure. So you probably don't want to make matters worse by owning funds or ETFs devoted specifically to these high-risk, low-return developing countries.

I say this with a particular country in mind: Russia.

I speak from harsh experience. Until very recently, I owned shares of one of the top Russia-focused funds, Templeton Russia & Eastern European Fund (NYSE: TRF), a closed-end mutual fund that usually devotes about 75% of assets to Russia and the rest to other countries of Eastern Europe such as Kazakhstan, Cyprus and the Ukraine. The fund was in the top 1% of its category for the time period I owned it (the past 15 years), so I know I couldn't have made a better choice. Still, long-term returns were relatively meager and not worth the wild ride, in my opinion. And mind you, this is one of the best Russia-focused funds, let alone a mediocre or poor one.

During the past 15 years, the fund delivered total returns of about 8% per year, which is what you might have hoped for from a much more conservative investment. And consider what shareholders had to endure to get that 8%, especially in 2008, when all hell was breaking loose in the financial sector. That year, the fund dropped 78%, more than twice the 37% the S&P 500 lost. This sort of outrageous volatility is typical of Russia, and it's just one reason to minimize your exposure.

Here are several others...

Corruption. Though it has been two decades since the fall of the USSR and the birth of Eastern Europe's market economy, the region still has a reputation for rampant corruption. Peter Loukianoff, an investor with Russian venture capital firm Almaz Capital Partners, for example, recently reported that extortion of Russian business owners is still common and often occurs as demands for tax payments by people claiming to be with a public service. Loukianoff said he knows of cases in which as much as 40% of profits go for these so-called taxes.

In the beverage industry, it's estimated that 46% of the vodka sold in Russia is produced by companies that are not paying taxes, which gives these companies an unfair advantage over foreign brands and competitors who pay taxes.

Russia is also doing a poor job of protecting business property rights. In the clothing industry, for example, an estimated 25% of products are counterfeits produced more cheaply but sold under an existing brand. According to Bill Browder of Hermitage Capital, one of the first and biggest foreign investors in Russia, accepting bribes and other forms of corruption that create an uneven playing field for businesses are common even at the highest levels of government.

Overreliance on Commodities. One reason Russia suffered so badly during the global financial crisis is so much of its economy -- 40-45% of gross domestic product (GDP) -- consists of exports of oil and gas, which can be wickedly volatile in price. Oil, for instance, fell from about $145 to $30 a barrel between July and December 2008, nearly an 80% decline in only a five-month period.

This prompted Russian leaders to start better diversifying the economy into other areas, like technology. One goal, for example, is to build a $30 billion nanotechnology industry by 2015. I'm skeptical, though, because Russia is considered a very tech-unfriendly country. And, rising energy prices (oil has been back to around $100 a barrel for a while now) may undermine the will to change, just like cheaper energy prices helped sap the United States' motivation to develop alternative fuel sources during the past couple decades.

Lack of Transparency. Russian companies aren't typically very shareholder-friendly in that they don't disclose nearly as much information about their finances, business practices or ownership structure as their counterparts in Western Europe and the United States. This makes it a lot more difficult to determine how much their shares are actually worth, calling into question the accuracy of the prices of publicly-traded Russian stocks.

In addition to the problems I've already mentioned, there's also the issue of the Russian government having a lot more power over partially or fully state-owned companies than foreign investors may realize. Thus, it's much easier for the government to step in and influence investing, borrowing and strategic decision-making.

Action to Take --> Although Russia's market economy showed great promise when it began to emerge two decades ago, it hasn't lived up to its potential by a long shot. I doubt it ever will. Sure, Russian stocks have provided some unbelievable returns in relatively short periods of a few months to several years, but long-term performance doesn't justify the extreme risk and volatility of these stocks.

I suggest completely avoiding Russian stocks and Russia-focused funds and ETFs. You can get more than enough exposure to the region through a diversified emerging markets fund or ETF.

-- Tim Begany

Tim Begany does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: Tim Begany
Whatever You Do, Don't Buy into this Emerging Market

Why I'm STILL Holding on to This Stock

David Sterman — Fri, 10 Feb 2012 10:00:00 -0500

It was bound to happen. When I first began looking at stocks to add to my $100,000 Real-Money Portfolio, I knew I'd eventually come to a crossroads where I might have a holding that didn't quite turn out how I'd hoped (or at least not yet), and I'd be faced with the crucial decision of whether to hold my ground or sell.

Take a look at my $100,000 Portfolio below. Based on this snapshot, everything looks pretty good -- but there's one key holding that I want to focus on today, mainly because it's taking a beating in today's trading session.

When I added Exide Technologies (Nasdaq: XIDE) to my $100,000 Portfolio last week, I classified this pick has having ample risk along with potentially strong upside.

As I wrote back then, "for stocks like this, it's often best to wait for a tangible improvement in business conditions." But I added that "the market is not cooperating with that plan. Shares of Exide are starting to percolate, recently moving across the $3.50 mark, which is likely a sign that a combination of cost cuts and price increases will enable Exide to get back on track in coming quarters. If I wait for confirmation of such a trend, then this stock could already be above $4 by the time that happens."

Well, that bullish trading action now appears to be the result of buying in hopes that Exide would announce that business is getting better. Instead, just-released quarterly results show that business remains in a funk. Despite a sharp blow to shares in Friday trading, I am standing pat on my current 1,500 share position.

It could have been worse
Exide's fiscal third quarter results were not disastrous. Sales of $784 million were roughly $20 million below the consensus forecast. And while the company earned just $0.06 a share in the quarter -- below the $0.20 consensus -- it still marks a return to profitability after three straight money-losing quarters.

The mild winter in the United States led to a drop in the typical pattern of replacement battery purchases, and Exide likely would have exceeded sales forecasts and come much closer to consensus EPS forecasts had winter weather been more typical. Still, the December and March quarters are typically Exide's strongest -- due to cold weather -- and the company is likely to miss March quarter estimates as well for that same reason.

Equally important: The subpar quarter doesn't raise further concern about deep distress on the balance sheet. Exide still has $100 million in cash and another $150 million on its untapped credit line. Management predicts a fairly robust level of free cash flow generation in the current quarter. As long as business doesn't weaken even further from current already-weak levels, then Exide's debt-laden balance sheet shouldn't lead to financial distress.

To be sure, shares are likely to languish in the near-term, as it's hard to spot imminent catalysts. Yet for long-term investors, this remains a very inexpensive stock in relation to potential cash flow generation in coming years.

Risks to Consider: Exide's balance sheet isn't of deep concern right now, but liquidity concerns would arise within a few quarters if business materially worsened.

Action to Take --> If you held off purchasing shares of Exide before, there's no reason to jump in right now. The prospect of a still-mild winter could cause shares to stay stuck in the $3 range in the months to come. Conversely, if you do own shares, sitting tight may be your best option, as quarterly results don't represent deepening troubles to come.

I'll take a closer look at business trends in coming weeks and months in hopes of more accurately anticipating the eventual operational upturn that I still suspect Exide is capable. But for now, I'm standing pat with my position until further notice.

[Note: When one of the companies in my portfolio reports important news, you'll want to stay on top of it. That's why I'm offering readers the chance to automatically have these updates sent to their email inboxes as soon as their published. Remember, my $100,000 Portfolio is completely free -- but only for a limited time. I can't promise how long we'll continue to do it this way, but in the meantime, I urge you to take advantage of this service while you can. Go here to sign up.]

-- David Sterman

David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of XIDE in one or more if its “real money” portfolios.

This article originally appeared on StreetAuthority
Author: David Sterman
Why I'm STILL Holding on to This Stock

Forget China: This Country is a Much Better Investment

David Sterman — Fri, 10 Feb 2012 08:30:00 -0500

Every few weeks, another major manufacturer announces plans to shut down production in China and bring jobs closer to home. Some companies such as GE (NYSE: GE) aim to boost production in the United States (GE will make hot water heaters in Kentucky, for example). That's because China is no longer the bargain it once was, thanks to a rising minimum wage and a strengthening currency. It's important for investors to be aware of this trend, because economists say it will only build in the years to come, as China's wages and currency are expected to rise even higher.

Perhaps the greatest beneficiary of this trend will be Mexico, which will always remain a low-cost environment for manufacturers. Since the North American Free Trade Agreement (NAFTA) was ratified in 1994, Mexico has seen a steady rise in goods shipped north of the border. More than 70% of Mexico's exports head to the United States, and that figure is expected to hit 75% in 2012. It's telling that even as global economies slumped in 2011, Mexico's exports still rose 13% to $336 billion, according to the CIA World Factbook.

Perhaps the clearest sign of increased economic activity can be seen in airport traffic. Aeroporuario del Sureste (NYSE: ASR), which operates nine regional airports, recently announced that passenger traffic rose 10% in January from a year earlier. Business executives scoping out new manufacturing opportunities are likely part of that spike.

Rising exports are creating myriad benefits from Mexico. First, thousands of workers are finding jobs in factories each year, pushing them from subsistence living into the lower middle class. That boosts demand for all consumer-facing businesses. Second, the firms that transport goods are seeing a rise in business. Lastly, the government is able to secure rising tax receipts, which is crucial when you consider that government-owned energy giant Pemex is seeing falling output in key energy fields, leading to reduced remittances to the government.

These three investments are a great way to play the surging Mexican export sector.

1. Celadon Group (NYSE: CGI)
This U.S.-based trucking and logistics firm operates six freight terminals across Mexico, augmenting its 11 terminals spread across the United States and Canada.

Moving goods across the border used to be quite costly for Celadon (and its customers), as Mexican drivers were prohibited from driving freight more than 16 miles into the United States. Thanks to new legislation enacted last spring, that restriction has been dropped, helping Celadon and its peers to better compete with rail-focused freight carriers.

Sterne Agee calls Celadon a "prime way to invest in the re-energized Mexican manufacturing economy." The firm expects the lower costs associated with Mexican border crossing arrangements to steadily boost profits. They estimate Celadon's operating profit will rise from $23 million in fiscal (June) 2011 to $35 million this year and $44 million in fiscal 2013. Shares have posted a recent rebound but still remain roughly 20% below Sterne Agee's $18 target price.

2. NI Holdings (Nasdaq: NIHD)
This company, formerly known as Nextel International, is a major wireless phone service provider in Mexico, Brazil, Peru and Argentina. Its push-to-talk service has made it a big hit with business customers, helping NI Holdings to garner an industry-leading $50 in monthly ARPU (Average Revenue Per User). The company's focus on corporate customers should continue to pay off as more multinational firms develop facilities in the region.

NI is now investing in 3G Spectrum in each of these countries in order to tap into data-happy consumer markets. Meanwhile, shares have fallen almost 50% from their 52-week high on fears that price wars will sap margins. The company's decision to ramp up marketing expenses to maintain market share didn't sit well with investors, though. Yet a recent spate of insider buying helps underscore the notion that profit fears may be overblown. Six insiders bought a collective $2 million worth of stock in the past two months. Analysts note that at less than four times trailing EBITDA, NI Holdings is the most inexpensive stock in its peer group.

3. Grupo Televisa (NYSE: TV)
This media firm has seen its shares drift from $30 to $20 in the past five years, even as its long-term outlook has never been brighter. A rising middle class that is being created from all of the new manufacturing jobs is helping boost ad rates for firms like Televisa, which is the largest producer of Spanish language content in the world.

Televisa is also looking to tap into the English-speaking Hispanic market in the United States, as second-generation Mexican-Americans seek more programming in English. That's a wise move, because the Latino portion of U.S. society is the fastest-growing demographic group. Televisa's exposure to Spanish speakers and English speakers helps create a broader and more compelling platform for advertisers that want to develop cross-border ad campaigns.

Risks to Consider: When the U.S. sneezes, Mexico catches a very bad cold. The country's economy is increasingly dependent on the U.S. for trade, and a slowdown in economic activity here would be deeply felt across the border.

Action to Take --> All three of these companies stand to benefit from Mexico's coming growth spurt. Investors that simply want broad-based exposure to the economy should consider a low cost exchange-traded fund (ETF) such as the iShares MSCI Mexico Investable Market Index (NYSE: EWW). The Global X Mexico Small cap ETF (Nasdaq: MEXS), which was launched last spring, has a very appealing focus on Mexico's smaller, faster-growing companies. This ETF is still too illiquid and immature to recommend at this point -- but surely worth monitoring.

[Note: If you haven't heard about this unique opportunity, then I want to tell you about it now. StreetAuthority has staked me with $100,000 of real money to invest in my absolute best ideas. For a limited time, you'll be able to follow along with me completely free. Go here to learn more.]

-- David Sterman

David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Sterman
Forget China: This Country is a Much Better Investment

The World Has to Have this Resource... But There Simply Isn't Enough of It

Nathan Slaughter — Thu, 09 Feb 2012 13:00:00 -0500

How would you like to own a company that is GUARANTEED to sell everything it can produce?

You could charge any price for your product and it wouldn't matter. The world is so desperate for what your selling it will pay ANYTHING to get its hands on it.

For most companies, the idea is merely a fairy tale... If Coca Cola (NYSE: KO) tried to sell you a 20 oz for $10.00, then you'd probably laugh as you went to grab a regular priced Pepsi.

But Coca-Cola doesn't sell uranium... and a nuclear power plant operator can't just switch to an alternative fuel source as easily as we can find a different beverage -- making demand for the metallic stuff HIGHLY inelastic.

That's one of the reasons I think it could be time to invest in uranium. Let me explain...

Like many global crises, the story starts here in the United States.

Most people have never heard of the "Megatons to Megawatts" program. Put simply, the agreement ships uranium harvested from dismantled Russian nuclear weapons to use as fuel in nuclear reactors in the United States. In 2013, this 20-year nuclear warhead agreement between the United States and Russia will expire.

Here's the kicker: This program accounts for half the U.S.' nuclear fuel and 10% of our total electricity. The amount of electricity produced thanks to this program is more than solar, wind and hydroelectric combined. But when it expires in 2013, there's going to be a massive shortfall of uranium in the United States.

In fact, our power plants need about 40-60 million pounds of uranium annually to operate, but domestic mines spit out just 4 million (about 6-10% of what we need).

Then there's the rest of the world....

It might come as a surprise after all the negative headlines... but nuclear power is still a growth industry, despite the Fukushima disaster in Japan.

Only 10 of the world's 445 reactors have stopped operating since the accident. Meanwhile 60 new ones are under construction... and 370 more are in the planning stage.

The hundreds of new reactors being planned are driving a frantic scramble for uranium inventories. You need 1.5 million pounds of uranium at startup to get a reactor going. And you need 500,000 more pounds to burn every year. Utilities like to hold three to four years of inventories. This adds up to big numbers when you consider that the world digs up only 140 million pounds a year.

If we look out over the next 8-10 years, which is how long it takes a nuclear power plant to become operational, the market is about 400 million pounds short of demand.

In other words, the uranium we're now digging out of the earth covers just 65% of what these reactors will need. The new supply will have to come from somewhere, or the price of the existing supply will skyrocket.

OK, so we'll just find more of the stuff, right? Wrong.

Greg Hall, director of one of Australia's top uranium explorers, recently told the World Nuclear Association to expect no more than five significant new finds in the next decade.

Nuclear power generators know they're soon going to be standing in a much longer line for Uranium. Consequently, uranium-poor countries are scrambling to lock up as much uranium as they can.

Indian power generators are hoarding huge quantities... and buying stakes in African mines.

China is buying out foreign uranium miners lock, stock and barrel. Reuters recently reported that China Guangdong Nuclear Power is trying to take over London-based Kalahari Minerals. Kalahari is the biggest shareholder in one of the world's largest uranium projects. This will give the Chinese company access to a world-class uranium project.

China mines just 2 million pounds of uranium a year -- even less than we do. So it has no choice but to buy it where it can.

China says it will boost uranium imports fourfold to 50-60 million pounds a year by 2020. At that point, China will be gobbling up 25% to 30% of total global production. There's no way to do this without sparking a price war.

We could see uranium prices soar to $100, $200, even $1,000 a pound. That's a long way up from today's $55.

Think that kind of a price advance is fanciful? Think again. Uranium spot prices were just $10.75 per pound in early 2003. By the middle of 2006, they had spiked to $45 per pound. And six months later, prices were climbing towards triple-digit territory -- a near 10-fold increase.

These guys will pay whatever it takes. They don't care how much it costs -- they just want to be sure they have it.

After all, it costs about $2 billion to build a new nuclear power plant. So paying $100 a pound for uranium to keep your plant running is a drop in the bucket. In fact, even if the price of uranium skyrockets to $1,000 a pound, nuclear energy would still be cost-effective.

Action to Take --> So make sure to keep an eye on what's going on in the uranium patch. As the "Megatons to Megawatts" program draws to a close, and global stockpiles continue to shrink, the metal's price could skyrocket. By the looks of it the world needs more uranium, and there simply isn't enough to go around...

[Note: Once the "Megatons to Megawatts" program winds down, 10% of America's electric energy supply will suddenly dry up. Once that supply is disrupted, the price of uranium mining stocks could go through the roof... I'm talking about gains in the hundreds of percent. For more information on how you can profit from this coming supply crunch, I invite you to watch this presentation.]

-- Nathan Slaughter

Nathan Slaughter does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: Nathan Slaughter
The World Has to Have this Resource... But There Simply Isn't Enough of It

3 Stocks You Should Avoid at All Costs

James Brumley — Thu, 09 Feb 2012 11:30:00 -0500

Analysts aren't always right. They're not always timely either. But when they're in consensus about a stock, especially when that opinion is bearish (analysts are notoriously rosy with their outlooks), then there's a good chance their collective opinion is on target, and investors might want to heed their outlook.

This proverbial "aligning of the planets" is usually observed in bullish scenarios, but it works the other way, too. That's what makes these three stocks especially scary right now. All three are deep into a net "sell" rating, and it doesn't take a long look at their charts or current stories to agree with the professionals' pessimism.

1. Brown Forman (NYSE: BF-B)
Any stock that's more than doubled since the March 2009 low is clearly doing something right, and especially so if that stock barely faltered during that uptrend. There's a bit of a problem with distiller Brown Forman doing it, though. While earnings have grown during that time, the earnings growth hasn't kept pace with the stock's appreciation. The end result is a rich price-to-earnings (P/E) ratio of nearly 21. Were it a red hot tech stock, such a valuation might fly. For the spirits industry, though, that's pushing it.

Analysts seem to agree, too. Of the 11 current opinions on Brown Forman, six are "holds" and three are outright "sells." That's rough, yet may still understate the aggregate dire outlook.

Despite efforts to weed out an inherent bullishness in analyst opinions in the early 2000s, that bias never really went away. So, even this pessimism for the high-profile large cap may be muted, as some of these research firms don't want to ruffle Brown Forman's feathers.

2. Progress Energy (NYSE: PGN)
What's not to like about an electric utility company? It's certainly not a sexy business, but how could something so benign prompt a strong opinion either way? Whatever the answer is, Progress Energy has managed to do it.

To be fair, the North Carolina-based utility holding company isn't the scourge of the market. Of the eighteen opinions out there on the stock right now, seventeen are "holds" and one is an "underperform." Remember, however, that a bullish bias still exists within the analytical world. At least a few of those "holds" are actually probably closer to "sells" or "underperforms" than analysts may care to admit.

The growing concern about Progress Energy's future isn't unmerited. Although the company has a pretty even mix of coal, nuclear, natural gas and hydroelectric power resources, that diversity hasn't staved off what appears to be an earnings peak in 2011. This year's anticipated income of $3.08 per share is only a tad below what should be $3.10 for 2011 (fourth-quarter 2011 numbers aren't in yet). But, all big trends start out as small ones.

3. Tootsie Roll Industries (NYSE: TR)
Finally, though not heavily followed like Progress Energy and Brown Forman, candy-maker Tootsie Roll Industries has fallen out of favor with analysts. Well, one analyst anyway -- a $1.4 billion company doesn't draw too big of a crowd. Even so, one "sell" rating and a price target of $19.00 compared with the recent share price of $24 is enough to give pause.

Tootsie Roll Industries' praises as a reliable dividend payer have been well-deserved. The quarterly dividend of just under a penny in the late 1980s has swelled -- at an even growth pace -- to a quarterly payout of $0.08 per share now. There's been a growing nagging problem since 2000, however. Annual earnings have fallen from the $1.50 area then to the $0.90 area now... and they're still sinking.

Don't misunderstand; there's still enough cash left over each quarter to keep paying the dividend. Unless things change, though, that won't be the case for a whole lot longer.

One of the key hurdles Tootsie Roll is facing is that the price of sugar skyrocketed in 2010 and has since stayed firm. While larger players such as Hershey (NYSE: HSY) have managed to contain some of their input costs and pass the rest of the cost along to customers, Tootsie Roll Industries isn't quite positioned to do the same. So something's got to give before this stock's a healthy "buy" again.

Risks to Consider: Companies can and sometimes do dig themselves out of holes, and analysts eventually change their minds. As unlikely as a lightning-fast switch could be in any these cases, traders should be prepared for all contingencies.

Action to Take --> Nothing lasts forever, and the excessive risks associated with all three of these stocks may eventually fade, with the companies righting their respective ships and value being re-created. Until that time comes, though, would-be buyers should know they're facing a headwind with these three stocks. There are easier ways to make money in the market right now. In fact, if you've got the stomach for it, then you might want to consider shorting these stocks.

-- James Brumley

James Brumley does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: James Brumley
3 Stocks You Should Avoid at All Costs

A Low-Risk Pick for my $100,000 Real-Money Portfolio

David Sterman — Thu, 09 Feb 2012 10:00:00 -0500

I've been thinking about biotech stocks a great deal lately. The sector seems to be trading much better in the early weeks of 2012, with a few spectacular gainers already in the bag and likely more to come.

Yet investors are also well aware many biotech stocks simply flame out as cash dwindles or as a drug fails to meet clinical testing hurdles. So how do you gain potentially big upside without suffering significant downside (which is my entire $100,000 Portfolio mission) in this speculative sector?

I think I've found the perfect vehicle.

It's a company with ties to a range of promising drugs and only needs to see a few hits to give its shares a solid boost. I'm talking about Ligand Pharmaceuticals (Nasdaq: LGND), which has been around for more than 20 years. After a major revamp about five years ago, the company is just now hitting its stride.

Just-released fourth-quarter results underscore a long-awaited milestone. Ligand had been losing money because its portfolio of drugs had yet to mature, but now it's finally profitable -- and potentially hugely profitable within a few years.

Before I get into Ligand's slate of investments, let me show you what this company has looked like by the numbers.

As you can see in the table above, Ligand's heavy investments to acquire the rights to promising drugs have led to a string of money-losing years. EBITDA is the more salient metric than earnings per share (EPS), because it best highlights an ongoing cash burn. Not only did Ligand sharply reduce the EBITDA drain in 2011, it actually delivered positive EBITDA in the fourth quarter -- for the first time in a number of years. And now that Ligand is in the black, it's highly unlikely to slip back into the red.

Credit for this company's coming turnaround goes to CEO John Higgins, who took the reins in January 2007. Since then, he has deployed the company's cash into four key deals, which have provided a pipeline of drugs, and more important, some key biotechnology platforms that can boost the efficacy and safety of many other companies' drugs.

Reaping what they sow
Through its investment in various small biotech firms, Ligand now has exposure to 60 different drugs that are either in clinical trials or are already on the market. Specifically, roughly 10% of its drug pipeline has already received Food and Drug Administration approval, another 10% is in Phase III testing, another 25% is in Phase II testing, with the remainder either in Phase I or pre-clinical testing.

Here's a quick summary of a few key programs that are already generating income:

• Captisol. Captisol is a chemical solution that makes drugs more stable and can lead to more precise dosing. More than 20 drugs currently in development are being tested with Captisol. This platform is providing a boost to many of Ligand's drugs in development, and is being licensed by major pharmaceutical firms to improve the performance of existing drugs. Partners include Baxter (NYSE: BAX), Merck (NYSE: MRK), Bristol-Myers Squibb (NYSE: BMS) and Medicines Co. (Nasdaq: MDCO).

• Promacta. GlaxoSmithKline (NYSE: GSK) currently sells this drug, which stimulates platelet formation and targets patients with bleeding disorders. Glaxo is also testing Promacta to gauge its efficacy in patients with hepatitis C. According to the World Health Organization, about 170 million people worldwide are infected with the hepatitis C virus, which can result in cirrhosis of the liver and liver cancer. If Promacta proves to be efficient in the treatment of the disease, then it could potentially become a blockbuster drug.

Ligand earns a sliding 5% to 10% royalty scale, depending on sales volume. It is likely to make around $10 million in Promacta royalties this year, but this figure could be 10 times higher by the middle of the decade. UBS projects sales of Promacta to rise 150% to $123 million this year, and sees 2013 sales exceeding $200 million, on the way to $500 million in sales by 2015.

Ligand's sales are expected to remain stable or trend moderately higher over the course of 2012 as these two drug platforms gain greater traction. Management has formally issued guidance for 2012 sales of $30 million and positive cash flow, though this figure appears to be conservative in light of recent quarterly sales run rates.

Not only do the two platforms have significant growth opportunities in the years ahead, but Ligand's pipeline of yet-to-be-approved drugs also looks quite promising.

For example, Ligand's partner Onyx Pharmaceuticals (Nasdaq: ONXX) is testing a drug called carfilzomib, which is a Captisol-based protease inhibitor that has appeared quite effective in the treatment of multiple myelomas (blood cancers). Phase II testing is underway, and carfilzomib could be on the market a year from now. The company and the analysts who follow Ligand say this drug also has the potential to be a blockbuster.

Behind carfilzomib stands a fairly deep drug pipeline, though it's too early to place a value on it. The company is spending about $16 million in general overhead each year and another $10 million on research and development (R&D) -- with partners spending much more on their own R&D that could yield royalties to Ligand.

So combined, we're talking about roughly $26 million in annual expenses. Notably, Ligand's revenue stream has already surpassed this amount and is likely to march much higher in 2013 and beyond. That's why I think this former money-loser should be a money-maker from here on out.

The Downside Protection --> Shares have traded as low as $9 when the market was in full sell-off mode last summer. If the market hits another deep rough patch in 2012, then that's a floor that you need to think about. Insiders tend to step in and support the stock with open market purchases in the $11 range. Now that Ligand is profitable, shares may never touch those lows again.

Upside Triggers --> The two drug platforms noted above are just beginning to hit their stride. As a result, 2012 should see a steady stream of announcements from Ligand and its partners regarding clinical trial progress or new sales agreements. Analysts are still hard-pressed to specifically gauge forward quarterly revenue streams, but the projected income statements should get much more clarity over the course of 2012.

As a very rough gauge, assume 2012 sales of $30 million, 2013 sales of $40 million and sales approaching $100 million by 2015. Notably, these sales carry very high margins, which is why analysts say Ligand could earn $3 to $4 a share by 2016. If this scenario plays out, then shares could rise from a current $14 to $30 or $40 in the next few years.

Action to Take --> I will be buying 700 shares of Ligand (or roughly $10,000 worth) 48 hours after you read this.

I'm not expecting rapid appreciation for this stock. Indeed, it carries a fairly low beta and wouldn't necessarily surge in value just because the market takes off. More cyclical holdings in my $100,000 portfolio, such as Ford (NYSE: F) and Alcoa (NYSE: AA), have much greater leverage to expectations of a rebounding U.S. economy. That said, Ligand's shares are more likely to hold their own if the U.S. economic outlook becomes constrained. Frankly, this isn't a stock to hold for the next six months, and instead should be seen as a solid long-term growth portfolio holding.

[Note: Be sure not to miss out on my next portfolio investment. Go here to sign up to have these articles delivered straight to your email inbox. You'll also receive timely updates on my holdings -- and best of all -- for a limited time, it's completely free.]

-- David Sterman

David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of F, AA in one or more if its “real money” portfolios.

This article originally appeared on StreetAuthority
Author: David Sterman
A Low-Risk Pick for my $100,000 Real-Money Portfolio

3 Turnaround Stocks You Should Buy NOW

David Sterman — Thu, 09 Feb 2012 08:30:00 -0500

The appeal of investing in turnaround stocks is very compelling. Some companies look to revamp products to re-invigorate sales growth. Others find ways to slash expenses and unlock major profit-margin gains. Still, others look to clean up a debt-laden balance sheet, which is often a key reason for investors to disregard a stock. No matter the plan, long-depressed shares can get a new life as these moves pay off.

A portfolio filled with turnaround candidates is a bad strategy. Even the best turnaround plans often go askew. Still, stocking your portfolio with one or two potential rebound candidates can help you beat the market averages.

Here are three potential turnaround stocks I'm watching closely. Some of these ideas may fail to gain traction, but holding a basket of these should pay off.

1. Wendy's (NYSE: WEN)
Roughly a month ago, I suggested this fast food operator's new CEO, Emil Brolick, had a great industry track record and would soon articulate an impressive turnaround plan.

In late January, Brolick delivered a clear strategy for Wendy's focused on improved breakfast results, spruced up stores and the addition of higher quality (and higher-priced) menu items. For Wall Street, this may be a hard plan to swallow. Wendy's plans to spend heavily in 2012 to transform the business, so quarterly profits will likely remain weak. The fact that beef prices are expected to rise higher in the next few quarters is just another headwind.

But turnaround investors gauge a company's plan by where it will likely be in 18-24 months. There's no assurance that Brolick's strategy will succeed, but even if he accomplishes only half of his goals, then investors will probably come to notice just how stunningly cheap this stock is compared with McDonald's (NYSE: MCD) stock.

2. Nokia (NYSE: NOK)
This is a turnaround play I profiled just two weeks ago. At the time, I wrote the upcoming launch of pricier Lumia phones would likely really captivate investor interest. Well, the Lumia 900, the company's flagship phone, is expected to make its debut at the end February at the Mobile World Congress in Barcelona. It will be curious to see how shares respond if tech reviewers give the phone high praise.

Of course the proof will be in the pudding. Will Nokia sell enough phones -- and earn enough profits -- to finally reverse a long losing streak? The current share price implies a great deal of skepticism, though these are the opportunities that offer the biggest upside. Nokia has much to prove, but a long-awaited turnaround may just take root in 2012. If Nokia can make a moderate dent in the Google (Nasdaq: GOOG)/Apple (Nasdaq: AAPL) hegemony of the smartphone market, then this stock could easily double.

3. Imperial Sugar (Nasdaq: IPSU)
The nation's largest cane sugar refiner suffered a major blow in February 2008, when a key facility in Georgia exploded, killing 14 people. It took several years and a huge amount of cash to get the facility back on line, and though the company ultimately recouped the lost money through an insurance settlement, its operations have never fully recovered.

Part of the company's woes stemmed from the fact that contracts that were signed before the refinery explosion needed to be honored -- at prices below current levels, crushing the company's profit margins. More recently, Imperial Sugar has seen prices for its sugar-cane processing slump as beet sugar farmers flooded the market. Cheaper beet sugar means cheaper refined sugar, forcing Imperial Sugar to cut prices in response.

Despite the clear headwinds, shares managed to stay in a $10 to $20 trading range in subsequent periods. They actually rallied above $20 last summer as the pricing dynamics in the sugar market began to look much more favorable.

And then, the bottom fell out.

Imperial Sugar shocked investors by reporting an unexpected quarterly loss for the June 2011 quarter, citing increased competition from Mexican sugar growers. Expected gross margins of 10% fell all the way to -6%. For a company that only recently saw margins begin to rebound, this was the last straw for many investors. On Aug. 5, 2011, shares tumbled 59% to $9.41.

Pretty soon, investors realized that Imperial Sugar's debt load would soon become a real problem -- especially if profit margins didn't rebound quickly. At the end of the June quarter, the company had just $300,000 in cash and $79 million in debt. The company would need to tap a credit line, but weak EBITDA meant Imperial Sugar would eventually trip covenants on that credit line.

As a final ignominious blow, the company asked for an extension to file its 10-K in December, giving the impression of utter chaos. Hamid Korshand, who had been closely following the stock for several years at BWS Financial, and previously assumed that the company's assets were worth more than $20 a share, finally threw in the towel: "Like many, we have been surprised by the magnitude of everything gone wrong for the Company," he wrote in a final note to clients.

Fast-forward to January 2012, when shares moved below $3. Investors largely assumed the company would need to file for bankruptcy. Yet shares have actually started to move back up in recent sessions, perhaps after a comment from CEO John Sheptor on a Jan. 9 conference call, when he said the company was exploring opportunities to improve liquidity, including potential further asset sales.

"We are in the late stages of exploring with our partner the potential sale of our interest in Wholesome Sweeteners to a third party,” he said a month later, on Feb. 9. The company’s 50% stake in this organic sugar marketer is likely worth at least $50 million, based on recent sales and profit trends. Shares popped above $4 on the news.

If successful, this gives the company even more time to clean up its balance sheet, perhaps with more asset sales. As noted above, NWS Financial's Korshand assumed Imperial Sugar might be sitting on $20 a share worth of assets. To be sure, the company's weakened state gives it little financial leverage in discussions with potential buyers. Assuming the assets are worth half as much as Korshand thought, then shares would still be worth close to $10. That's still almost 200% above the stock's current level.

Risks to Consider: Turnarounds don't always play out according to plan. In the case of Wendy's and Nokia, this likely means shares would languish at current levels. For Imperial Sugar, an inability to turn things around could ultimately render its stock worthless.

Action to Take --> Turnarounds are slow to be appreciated by Wall Street. So for a company such as Wendy's or Nokia, you may actually see business start to improve before the share price responds. In this case, now is a fine time to start researching these companies, looking for tangible signs of improvement before you buy.

-- David Sterman

David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of GOOG in one or more if its “real money” portfolios.

This article originally appeared on StreetAuthority
Author: David Sterman
3 Turnaround Stocks You Should Buy NOW

Earn up to 8% Yields with these 3 Old-Fashioned Telecoms

Lisa Springer — Wed, 08 Feb 2012 13:00:00 -0500

With all of the media buzz that surrounds next-generation smartphones and their new apps, it's hard for investors to get too excited about good old-fashioned telecoms these days. That's a shame, since these companies can be a rich source of dividends for income investors. Many pay 5% yields, and some yield as high as 9%.

Most of these high-yielding telecoms were founded decades ago to provide local and long-distance landline telephone services to rural communities. You may think these providers are becoming extinct -- after all, the number of landline connections is contracting roughly 10% a year -- but that's simply not the case. Instead of shrinking, these companies are offsetting eroding landline revenue with revenue from new services such as broadband Internet, digital TV and web hosting.

Rural telecoms can offer rich income opportunities for investors because of their stable cash flow and modest spending needs. Many are able to pay hefty dividends that should grab any income investor's attention.

Here are three of my favorite high-yielding telecoms...

1. Consolidated Communications Holdings (Nasdaq: CNSL)
Yield: 8%

This rural telecom has served local markets in Illinois, Texas and Pennsylvania for more than 100 years. At present, Consolidated has about 230,000 local and long-distance landline customers, 110,000 broadband Internet customers and 33,000 digital TV subscribers.

Although Consolidated's revenue fell 4% in the first nine months of 2011 to $280.6 million due to asset sales and fewer access lines, cash from operations for this cash cow improved 17% to $93.3 million. Consolidated had more than enough cash flow to easily cover $34.7 million of dividends and $31.2 million of capital spending. In addition, cash on the balance sheet rose by $20 million in the nine months to reach $92 million in September.

This week Consolidated announced plans to acquire broadband services provider SureWest Communications (Nasdaq: SURW) for $340.9 million. Surewest operates in the Kansas City and Sacramento markets. Once the deal closes, Consolidated will have operations in six states, combining for $620 million in annualized revenue, an improved product mix with 70% of revenues from business and broadband customers, and growth opportunities from its expanded footprint.

The company also expects to realize $25 million in annual operating synergies and benefit from $67 million in operating loss carryforwards from SureWest that can be used to offset future taxes.

Consolidated pays a $1.55 annual dividend and yields 8.0%. Payments haven't increased in four years, but new growth opportunities from SureWest could spur future dividend growth.

2. Hickory Tech Corp. (Nasdaq: HTCO)
Yield: 5%

Hickory Tech delivers broadband Internet, digital TV, voice and data services to businesses and homes in Minnesota and Iowa. The company's customer base consists of some 49,000 local and long-distance landline customers, 20,000 broadband Internet customers and 11,000 digital TV subscribers.

Hickory Tech has done a good job increasing the revenue contribution from business and broadband customers, which currently account for 70% of revenue compared with less than 50% five years ago. Additional growth will come from the acquisition of IdeaOne Telecom, which the company announced in December.

IdeaOne owns a fiber optic network serving customers in Fargo, North Dakota. Through this acquisition, Hickory Tech gains 3,600 new business and residential customers and extends its multi-state fiber network into new markets. Hickory Tech expects the $28 million acquisition to be immediately accretive to cash flow, and to close the deal in the first quarter of 2012.

During the first nine months of 2011, Hickory Tech nearly doubled cash flow from operations to $24.8 million from $12.9 million on 4% growth on a total $124.0 million in revenue. The company had plenty of cash left over after investing $14.8 million in capital expenditures and after paying $5.4 million in dividends. Hickory Tech has been paying dividends for more than 60 years and raised the payment twice in the past five quarters, including a 4% increase in September to a $0.56 annual dividend rate.

3. Warwick Valley Telephone Co. (Nasdaq: WWVY)
Yield: 8%
Warwick provides telecom services in the Hudson Valley between New York and New Jersey, and expanded its business last July by acquiring Alteva for $17 million. Alteva provides cloud-based unified communication and voice-over-Internet services to businesses. The acquisition added new higher-margin services and $7 million (a 30% increase) to Warwick's annual revenue.

Reflecting Alteva's contribution, Warwick's revenue jumped 9% to $6.8 million in the third quarter of 2011, compared with $6.3 million in the third quarter of 2010. Higher costs and acquisition-related charges, however, caused Warwick to record a third quarter net loss of $0.31 per share compared with earnings of $0.23 a share a year earlier.

Warwick's cash flow from operations only totaled $4.6 million in the first nine months of 2011 and barely covered $4.3 million of dividend payments. The good news for investors is that Warwick easily covers the dividend from distributions it receives from an infrastructure partnership. The partnership made distribution payments totaling $9.9 million to Warwick during 2011 and guarantees yearly payments of $13 million to Warwick through 2013.

Warwick has a 104-year history of dividend payments, and payments have increased by a total of 30% in the past four years. The last increase was 8% March 2011, to a $1.04 annual dividend rate.

Risks to consider: Dividends from these companies are generally considered safer than most because of stable cash flow, but even rural telecoms aren't immune from dividend cuts. A recent case in point is Alaska Communications Systems (Nasdaq: ALSK), which slashed its dividend by 77% in December in anticipation of reduced cost support from the Federal Communications Commission.

Action to take --> My top pick overall is Warwick because of good dividend growth and a safe high yield secured by partnership distributions. Warwick is guaranteed cash distributions of $13 million a year in the next two years, enough to cover the annual dividend four times over. Consolidated has rising cash flow, but the worst record for dividend growth. Hickory Tech has better cash flow and dividend growth, but this company is a micro-cap stock, which makes it somewhat riskier.

Lisa Springer

Lisa Springer does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: Lisa Springer
Earn up to 8% Yields with these 3 Old-Fashioned Telecoms

After a 40% Surge, This Stock Could Give it all Back

David Sterman — Wed, 08 Feb 2012 11:30:00 -0500

Last summer, when Netflix (Nasdaq: NFLX) was messing with its pricing plans, alienating its customers in the process, I spotted a clear opening for rival Coinstar (Nasdaq: CSTR), which runs a kiosk-based DVD distribution system.

As I wrote then: "Thanks to Netflix, Coinstar's DVD business will thrive for even longer than some short sellers had predicted. This is because it's increasingly apparent that Redbox looks set to take some market share. Simply put, it's a better deal for customers."

Six months later, Coinstar is now posting stellar results, and its shares are up more than 40%. In fact, a just-announced deal with Verizon (NYSE: VZ) to enter the streaming video market has led some to conclude that Coinstar's run has only just begun.

Yet a deeper look behind Coinstar's income statement, along with an unvarnished look at that Verizon deal, implies that the stock's run is almost done. If you own this stock, then it may be time to take profits. And for short-sellers, a case may slowly build in coming quarters.

A good but not great quarter
Shares of Coinstar surged nearly 20% on Tuesday, Feb. 27 on the heels of a blowout quarter. Sales of $520 million were roughly $20 million ahead of forecasts. Earnings per share (EPS) of $1 were far ahead of the $0.64 consensus forecast. This will spike a stock any time. Most of that gain, however, came from lower-than-expected overhead, a reduction in credit card transaction fees, and a lower-than-expected tax rate.

Make no mistake: The $520 million in sales is the direct result of rising market share. There are more Redbox kiosks in service (up 17% from a year ago), and each one is seeing higher utilization rates. So the 33% year-over-year quarterly sales jump, the best showing in five quarters, shouldn't be discounted.

Yet it's worth noting that the rate of new kiosks put into service will sharply slow in 2012, simply because the market is getting close to saturation. So Coinstar will only be able to count on rising utilization rates for further growth. This explains why analysts at Needham see sales growth slowing later this year. By the fourth quarter of 2012, they predict sales will grow just 8% (to $561 million) compared with the just-completed quarter.

Of greater near-term concern, Coinstar's blowout results were partially attributed to a heavy slate of new releases. Yet in the current quarter, there is a big drop off of new releases. And a current deal with Universal Studios may expire as soon as April. Universal is ratcheting up prices for new releases, and Coinstar may simply decline to stock Universal's new releases, according to analysts.

Streaming to the rescue?
Frankly, many investors have been predicting the demise of physical DVDs for quite some time, and they predicted that Coinstar would be posting shrinking sales by now. They were wrong. But the long-term migration to downloadable content is inevitable, which is why Redbox needed to ink this deal with Verizon.

Verizon will own 65% of the joint venture, with Coinstar owning the rest, with costs shared on a commensurate basis. And oh boy do these two firms have costs ahead of them. Consider this: Netflix sends $2 billion a year to movie studios and others to secure the rights to content. By this math, Coinstar/Verizon will need to shell out huge sums of money just to build up a storehouse of licensing agreements that Netflix already has in place.

Amazon.com (Nasdaq: AMZN) hasn't disclosed what it spends to secure the rights to stream various titles, but as a customer, I can tell you Amazon's selection in its Prime catalogue is very limited. Most movies I'd like to see are unavailable, although you have the option of paying extra for more current titles.
Another thing to consider is YouTube, which is owned by Google (Nasdaq: GOOG). The video website offers some titles for $2 or $3 and is already established. So the Coinstar/Verizon joint venture may find itself as the fourth horse in a four-horse race.

Coinstar's management anticipates that the development of the streaming service will create a $19 million drag on profits in the near-term, with a total potential capital commitment of $157 million. This implies the joint venture will spend a little under $500 million developing the platform and securing the rights to content this year. It's simply unclear how costs will be that low in light of what Netflix must spend for its streaming rights, let alone the upfront development costs already in place.

Coinstar/Verizon may look to develop a more rudimentary streaming service that only serves up films that are far beyond the "new release" time frame when studios charge top dollar. This may not strike much of a chord with consumers. As analysts at Dougherty & Co. note, "Without more details on the scope and pricing of the offering, it is tough to judge whether or not Verizon/Redbox can effectively compete with Netflix and Amazon in the over-the-top market." In a worst case scenario, Coinstar pours a lot of money into the effort, but still badly lags Netflix and Amazon in terms of market share.

Risks to Consider: It's best to let the dust settle before looking to potentially short Coinstar. Shares could extend this week's gains as some analysts speak of the company's prospects in a very bright light.

Action to Take --> Coinstar has done an extremely impressive job of capitalizing on Netflix's miscues. But Netflix appears to have regained its footing, as seen by recent robust quarterly subscriber growth. Moreover, Amazon has announced plans to ramp up its streaming video efforts sharply in 2012. For that matter, other streaming sites such as Hulu.com also appear to be building a strong following.

As a result, Coinstar's strong start to 2012 may peter out. That makes this a good time to start to examine the potential downside of this business model and book profits.

[Note: If you haven't heard about this unique opportunity, then I want to tell you about it now. StreetAuthority has staked me with $100,000 of real money to invest in my absolute best ideas. For a limited time, you'll be able to follow along with me completely free. Go here to learn more.]

-- David Sterman

David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of GOOG, VZ in one or more if its “real money” portfolios.

This article originally appeared on StreetAuthority
Author: David Sterman
After a 40% Surge, This Stock Could Give it all Back

How to Earn 12.9% Yields From Stocks Paying 5.4%

Amy Calistri — Wed, 08 Feb 2012 10:00:00 -0500

The story was picked up by the major news sources as a "cute" human interest feature. You might have seen the headlines like "How a Secretary Made and Gave Away $7 Million."

But for me, this wasn't some light news piece. This was a story that resonated deeply with me.

I didn't know Grace Groner, from Lake Forest, Illinois. From the stories, she was a woman who lived frugally. Her passing was of interest because her three shares of Abbott Laboratories (NYSE: ABT) grew into thousands of shares through decades of stock splits and dividend reinvestment. In total, her estate came in at roughly $7 million when she passed.

And while I didn't know Grace Groner, I did know Lillian Calistri.

The last time I saw Aunt Lillian was in 1990. I remember that a nephew had the misfortune of addressing her as "Lillian." She promptly looked us all in the eye and said, "You will continue to call me Aunt Lillian." We were all over 25 years old at the time, but in Aunt Lillian's world, adulthood was no excuse for bad manners.

Aunt Lillian taught home economics at Charleroi High School in Pennsylvania. After she retired in the 1950s, she moved to Tucson, Ariz. I remember thinking it was nice that she had been able to live comfortably in her golden years -- aided by a teacher's retirement and a nest egg from the 1952 sale of the family's ice cream business.

Here's the kicker. When Lillian died in 1993, her estate was worth north of $5 million.

Her broker was the only one who wasn't shocked. "They should have that kind of discipline on Wall Street," he said. Dividend reinvestment? You bet.

But there's something else to this story, and it's something that can help you earn larger dividends soon -- helpful if you don't have a lifetime to invest as Aunt Lillian and Grace Groner did.

They may not have realized it at the time, but both the women in this story chose their investments wisely.

Abbott Laboratories, the company Grace Groner invested in, has paid more than 350 consecutive dividends since 1924. In 1990, the company paid $0.203 per share in dividends. Today, that amount has grown 826% to $1.88 per share.

One of Aunt Lillian's investments was International Business Machines (NYSE: IBM). IBM dished out its first dividend in 1913. Since then, it has gone on to pay nearly 400 more. In the past decade, IBM's dividend has increased 436%.

Neither ABT nor IBM had a particularly juicy yield at the time these women bought their shares. But they had something equally powerful: a corporate culture dedicated to rewarding shareholders -- especially with growing dividends.

And those growing dividends add up a lot quicker than you'd think.

In my Daily Paycheck portfolio, I already have two classic dividend payers that I put in the same class as Abbott and IBM -- AT&T (NYSE: T) and Kinder Morgan (NYSE: KMP).

If you had put $5,000 into AT&T five years ago, you'd have earned a 3.8% yield at the time. That amounted to $188 per year. But today, that $5,000 investment would be paying $305 a year if you simply reinvested your dividends. That's a 6.1% yield on your original investment.

Kinder Morgan is an even better story. Right now the shares pay a solid 5.4%. It's nothing to sneeze at, but thanks to the company's commitment to dividend growth, $5,000 invested just five years ago -- plus reinvested dividends -- is now earning 12.9% on your original investment, or about $650 every year.

Action to Take --> It's doubtful most of us will have decades and decades to invest like Grace Groner or Aunt Lillian. But this doesn't mean we can't see our dividends grow enormously in a span of just a few short years.

[Note: In December, StreetAuthority co-founder Paul Tracy used a dividend reinvestment strategy to collect more than $6,000 a month in dividends. To learn more about how to put this strategy to work -- no matter the size of your portfolio -- you can visit this link.]

-- Amy Calistri

Amy Calistri does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of T, KMP in one or more if its “real money” portfolios.

This article originally appeared on StreetAuthority
Author: Amy Calistri
How to Earn 12.9% Yields From Stocks Paying 5.4%

4 Companies Buying Back Their Own Cheap Stock

David Sterman — Wed, 08 Feb 2012 08:30:00 -0500

In the past seven years, Home Depot (NYSE: HD) has bought back a whopping 600 million shares. That's really impressive until you realize many of the shares were bought back right when the stock was trading at a 52-week high.

Sadly, this example applies to many companies right now.

I've been looking at all of the companies that have announced buyback plans in the past two months, and most of the stocks in question are trading near their 52-week highs. Considering that the S&P 500 has more than doubled in the past three years, companies are conducting major buybacks because they have too much cash, and not because their shares are necessarily bargains.

However, I have found 10 companies with fresh recent buyback plans, all of which trade at least 20% from the 52-week high. In these instances, the companies are in a position to make their buyback dollars go a lot further. Take a look...

It's interesting to spot a pair of names in the for-profit education sector. This whole industry has been rife with crisis, as high student loan default rates led Congress to scrutinize lending practices more closely. This should create a healthier industry as schools become more focused on accepting the best candidates and better track their loan repayment performance.

The current stock buybacks at Capella Education (Nasdaq: CPLA) and Education Management (Nasdaq: EDMC) appear well-timed. Both firms have seen sharp drops in student enrollment, keeping their stocks out of favor. However, the cycle of negative year-over-year comparisons appears close to bottoming out, so both of these schools are expected to show enrollment gains starting in a quarter or two from now. For this reason, this is a perfect time to research these stocks.

Free cash flow = steady buybacks
Greeting -card company American Greetings (NYSE: AM) is the poster child for stock buybacks. The company has generated more than $100 million in free cash flow for seven of the past eight years, and since it's a largely mature enterprise, much of this cash has been used to repurchase company stock. In fact, shares outstanding have steadily fallen, from 82 million back in fiscal (February 2005) to a recent 39.5 million. The current stock buyback program could take that figure below 30 million.

To be sure, with minimal top-line growth, this is more of a value play, trading at less than eight times projected profit and around five times free cash flow. The free cash flow supports more than the buybacks: American Greetings sports a 3.9% dividend yield as well. Another key marker for value investors: The stock trades at a 21% discount to tangible book value.

Along with the buyback and the dividend, management is also spending more than $50 million a year to develop a strong set of online brands. Consumers may be buying fewer traditional greeting cards, but they are spending increasing amounts on online greetings, known as e-cards. These investments have led cash flow to slump in the most recent and current quarter, which is the key reason why shares fell to fresh lows when fiscal third-quarter results were released in mid-December.

Investors are wrestling with a growth target for this mature model, but it's still highly profitable. The company is seizing the opportunity to take its share count even lower while the stock remains out of favor.

Lear (NYSE: LEA)
This auto-parts supplier also sports a rock-solid balance sheet (with $1.1 billion in net cash) and produces robust cash flow. Lear's business has rebounded in tandem with the resurgent auto industry, so as industry volumes keep rising further in 2012 and 2013, Lear could see free cash flow approach the $500 million mark by 2013 or 2014.

Right now, analysts expect Lear to boost sales just 3% in 2012 (to $14.5 billion) and around 6% in 2013 (to around $15.4 billion). But this may prove to be too conservative a forecast, not only because the auto industry is expected to grow at a faster pace, but because Lear is also looking to take market share.

Merrill Lynch expects the major auto makers "to continue shifting toward fewer, well-capitalized partners in the supply base, which should favor strong companies like LEA." Merrill's $69 price target is roughly 50% above current levels. Lear may wish the stock to stay down in the near-term, though. If the company can complete the planned $700 million stock buyback at current prices, then the share count could fall by as much as 15%, helping to boost the stock in the future.

Risks to Consider: These companies appear to be buying shares at a discount, but if the market heads south in 2012, then current buyback activity will have looked premature.

Action to Take --> Quickly falling share counts are a sure-fire way to boost earnings per share (EPS), even if net income is growing at a slower rate. Moreover, buybacks ensure a degree of downside support because these companies are in the market every day defending their stock and creating a degree of support. You could do well by riding their coattails.

-- David Sterman

David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Sterman
4 Companies Buying Back Their Own Cheap Stock

These Stocks Look Ripe for a Pullback

David Sterman — Tue, 07 Feb 2012 13:00:00 -0500

As the market has crawled ever higher during the past three years, a clear theme has emerged: When the market slumps, investor pessimism gets carried to extremes; and when the market posts a strong rally, things are not as solid as they appear.

Indeed, that's where I think we are right now. The markets are in the midst of another strong run, though considerable challenges remain. Sure, we've seen a slew of positive economic reports in recent days, but the U.S. economy is far from healthy. Perhaps of greater concern: companies are reporting that sales are rising faster than profits, a sure sign that profit margins are slipping back. So if the U.S. grows in the 2-3% range in 2012, as most economists anticipate, then investors need to brace for slowing sales and perhaps falling profits in the quarters ahead.

That's not an argument to dump all of your stocks, but it surely calls for portfolio pruning. Harvesting winners and raising cash levels may be the best approach for the current market. Simply put, any stock that has risen by a considerable amount in recent months needs to be closely scrutinized to see if it has maxed out and is primed for a pullback. Some of these fast-rising stocks may be ripe for short-selling because their valuations now outstrip the reality on the ground.

The 24 stocks you'll see below have risen at least 30% in the past 13 weeks, and all trade for at least 25 times forward earnings estimates.

The list is filled with an unusual group: housing stocks. KB Home (NYSE: KBH), Toll Brothers (NYSE: TOL) and MDC Holdings (NYE: MDC) are all home builders that are being bid up on expectations that the housing market is about to turn up sharply. Masco (NYSE: MAS), which makes a range of building materials, has joined in the housing rally.

Yet there's a problem that looms. Housing may indeed start to turn a corner, but any increase in new home construction is likely to be painfully slow to unfold. The volume of unsold existing homes remains at a fairly high level, and that just counts the houses that are formally for sale. There are a large number of homeowners that have been loathe to unload their houses while activity remains slow. But if housing perks up, a lot of these homeowners may look to list their houses on the market as well.

Against that backdrop, these new home builders would be foolish to get ahead of themselves and start building many new homes "on spec." As Goldman Sachs succinctly noted in a Jan. 12 report entitled "Housing is healing but not fast enough to ignore valuations," the firm's analysts noted that "With homebuilding stocks outperforming the market by 3,500 basis points in the last three months, we would wait for a pullback or a clearer picture that housing is healing quicker than it currently is."

Don't gamble on these stocks
In recent months, a number of U.S. states have expressed an interest in getting into the gaming business. Visions of hundreds of new casinos dotting the landscape have helped propel shares of companies that supply the equipment used in these gaming halls, such as slot machines, card sorting machines, betting chips and casino-oriented software. This explains why Boyd Gaming (NYSE: BYD), Scientific Games (Nasdaq: SGMS) and Multimedia Games (Nasdaq: MGAM) are all up sharply in the past few months.

Take Multimedia Games, a provider of video-gaming equipment, as an example. At a recent $10, it has soared well past Brean Murray's $7 price target. That equates to roughly 25 times projected fiscal (September) 2013 profits. The key concern: even with the current stated plans for new casino openings in many states, this will never be a high-growth business. Sales peaked at $150 million in fiscal 2005, and are now stuck in the $125 million to $140 million range.

Analysts at Sterne Agee say Boyd Gaming is especially ripe for a pullback. Their $6.70 price target is about 30% below the current share price, noting that cash flow will grow at a slow place this year. For this casino operator, a move to open more casinos may actually push cash flow lower as many new casinos chase a fixed amount of customers. You can imagine a scenario where new and existing casinos grow quiet as consumers have more of them to from which to choose.

If a number of new casinos get built in coming years across the United States, then what will it mean for Las Vegas? Presumably, many gamblers will choose to stay closer to home. Boyd Gaming, with 40% of sales derived in Las Vegas, would have a hard time maintaining current profit levels, let alone be able to boost profits.

Risks to Consider: The rising market lifts all boats, especially high-beta stocks like these. If the market continues to strengthen, then it may be premature to sell these fast-gainers.

Action to Take --> Some of these recent gainers have high short positions, which means their recent rally may have been fueled by short covering. If the shorts found these stocks vulnerable at lower levels and have been covering positions at higher levels in the face of an ever-rising market, then these stocks may be suitable to short at these now-higher levels. Heavily-shorted names from the table above include:

• Avid Technology (Nasdaq: AVID) 19 days to cover (which is the number of shares held short divided by average daily trading volume).

• MarineMax (NYSE: HZO) 24 days to cover

• Toll Brothers, which saw short interest rise from 8.8 million shares at the end of 2011 to 10.6 million shares in the middle of January

• HMS Holdings (Nasdaq: HMSY) 10 days to cover

• Equinix (Nasdaq: EQIX), which saw its short position jump 13% in just two weeks to a recent 4.9 million shares.

Even if you're not looking for short sale candidates, many of these stocks look ripe for profit-taking if you currently own them in long-focused accounts.

-- David Sterman

David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Sterman
These Stocks Look Ripe for a Pullback

This May be the Best Emerging Market to Own Right Now

Tim Begany — Tue, 07 Feb 2012 11:30:00 -0500

Many investors have rejected emerging markets, and I can't say I blame them. As a group, emerging markets really went sour in 2011, dropping nearly 19% and trailing the S&P 500's 2% gain by about 21%. Still, I urge those who feel these markets are nothing but bad news to reconsider. After returning 76% in 2009 and 19% in 2010, they were due for a pullback. But now, emerging markets have resumed their upward march, rising more than 14% so far this year, compared with about a 6% gain for the S&P 500.

Now seems an especially good time for investors to jump into emerging markets, because their future once again looks bright. Assuming Europe's debt crisis continues to remain largely at bay, and I believe it will, some economists see emerging markets rising anywhere from 15% to 30% in 2012. Falling interest rates and cheap stock valuations resulting from the 2011 sell-off are among the catalysts that could help propel emerging markets sharply higher, these economists say.

Not all emerging markets have the same growth potential, though. So you might consider putting a portion of the funds you've earmarked for emerging markets into mutual funds or exchange-traded funds (ETFs) devoted specifically to the most promising developing countries.

My favorite emerging market for 2012 and beyond
South Africa may be one of the best places for emerging markets investors. I think its stock market is among those most likely to rise 30% in the coming 12 months. Here's why...

Economically, South Africa is a force to be reckoned with. After expanding at an estimated 3.5% rate in 2011, gross domestic product (GDP) -- now approaching $400 billion annually -- is expected to climb 4.3% in 2012, and growth should average right around 4.2% for the next 10 years, economists predict. In terms of GDP growth, this puts South Africa in same league as some of the more established emerging markets -- like Taiwan, were GPD is projected to rise 4.7% per year, and Brazil, whose economy is expected to grow 4.5% annually. South Africa is a powerhouse compared with some of the more troubled European economies like Italy, which is only projected to grow GDP by only 0.9% a year through 2020.

Although South Africa has long been known for the mining of diamonds, gold and other precious stones, minerals and metals, mining has actually become a progressively smaller portion of the South African economy. And for investors worried about these sometimes-volatile markets, that's a good thing. Mining now accounts for only around 3% of GDP, compared with about 14% during the peak years of the 1980s. Even so, South Africa's mining industry is the world's fifth-largest, behind China, the United States, Australia and Brazil.

Nowadays, agriculture is almost as important to South Africa as mining, accounting for 2.6% of GDP. In fact, South Africa has become a net exporter of agricultural products such as sugar, grapes, citrus fruits, nectarines and wine. South Africa continues to be a popular tourist destination because of its wildlife preserves and diverse culture, and tourism is estimated to account for as much as 3% of GDP.

As you might expect, manufacturing is becoming progressively more important and now generates about 15% of GDP. Auto production, the biggest area of manufacturing, accounts for nearly 8% of GDP. South Africa also has growing telecommunications, banking, e-commerce and retail industries. As a group, South African companies should grow earnings by 16% in 2012, compared with an 11.5% increase for emerging markets overall, analysts estimate.

Another reason to put South Africa at the top of your list of emerging markets to consider: Its economy could be a better defensive play than other emerging economies. This is because corporate earnings are mainly generated domestically, while other emerging markets tend to get their earnings from foreign sources. Plus, the financial system is one of the most efficient and well-regulated in the world, and debt only makes up about a third of GDP (compared with more than 100% of GDP in the United States). Thus, South Africa's economy is better insulated from shocks to the global economy, making it one of the less risky emerging markets in which you can invest.

Risks to Consider: Although South Africa may be relatively less risky, it's still an emerging market and its stock market can be very volatile. There's also no guarantee it will continue to evolve along the lines of current leaders like Brazil and China. High unemployment approaching 25% and other social problems could lead to stagnation and political unrest that derail growth.

Action to Take --> Consider including South Africa in your stable of emerging markets investments, both for its solid growth prospects and relative stability. Several diversified ETFs provide plenty of exposure, like Market Vectors Africa (NYSE: AFK), which devotes 28% of assets to South Africa. If you'd like a highly concentrated position in South Africa, look into the iShares MSCI South Africa Index Fund (NYSE: EZA). As its name suggests, this ETF only invests in South Africa. If you're not comfortable with ETFs, have a look at T. Rowe Price Africa & Middle East (Nasdaq: TRAMX), a traditional mutual fund with a 34% stake in South Africa as of Dec. 31, 2011.

-- Tim Begany

Tim Begany does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: Tim Begany
This May be the Best Emerging Market to Own Right Now

Up 150% in 4 Months, This Stock Could Double Again

David Sterman — Tue, 07 Feb 2012 10:00:00 -0500

I've noted on a few occasions that investing in shares of biotech companies is quite challenging for the average investor. In this case, as I suggested a few weeks ago, a biotech fund may be the best choice for some, since it reduces the risk of a specific holding plunging as cash dwindles or as a promising drug fails key testing criteria.

Well, a pair of recent big gainers now tells me that a "swing for the fences" approach still has some merit for others. Here's what's going on...

Back in early in October, I recommended three oncology stocks as part of a three-pronged approach to biotech.

Shares of Celsion (Nasdaq: CLSN) are off 27% since then, while Medivation (Nasdaq: MDVN) has shot up a stunning 330% in the same period. Yet it's the third pick, Threshold Pharma (Nasdaq: THLD), that has me the most intrigued. The stock is up 150% since I looked at it four months ago. And I think it's only getting started.

Hypoxia -- a word to know
Threshold Pharma has hit on a novel approach to fighting cancer tumors. The company's scientists realized that tumors thrive in areas with little oxygen, known as hypoxic regions. Threshold 's TH-302, which is being tested on pancreatic cancer, among other tumors, works best in areas with little oxygen, yet has the ability to leave surrounding healthy tissue alone.

TH-302 has proven quite solid in clinical trials. But since the company is constantly in search of fresh cash, and hasn't been able to line up a big strategic partner thus far, investors simply lost interest. By the middle of last week (Jan. 30), the company's entire market value had fallen to just $65 million. This figure drops to $40 million when cash is excluded. Investors appeared to assume that the TH-302 platform was not worth all that much.

The White Knight arrives
Threshold's management knew the company was sitting on valuable technology and was understandably in need of a confidence booster. Well, a White Knight finally arrived to change the company's fortunes radically. On Thursday, Feb. 2, Germany 's Merck KGaA announced it wanted to join forces in hopes to profit from the potentially huge upside that TH-302 offers.

After a quick review of the contractual terms, investors may still be underestimating Threshold's stock. Let's take a look at the math...

After a sharp two-day spike, Threshold is now valued at roughly $150 million. That's a fraction of what Threshold could make from the relationship with Merck KGaA. For starters, Merck has cut a check for $25 million as an upfront payment. Second, if upcoming clinical data remain promising (slated for release later this month), then Threshold will get another $20 million. Later this year, if other undisclosed milestones are achieved, Threshold gets another $35 million. If you're keeping score, that is all worth more than Threshold was valued by investors just last week.

Prior to obtaining approval from the Food and Drug Administration (FDA), TH-302 will need to pass a few more testing hurdles. If TH-302 continues to appear effective -- with minimal side effects, then Threshold will receive up to $280 million in additional milestone payments in 2013 and 2014.

If the drug finally gets approved, perhaps as soon as the fourth quarter of 2013 but more likely in 2014, then Merck KGaA would get global distribution rights to TH-302, while the two companies would share marketing rights in the United States. Threshold's royalties from Merck could bring in another $245 million.

Add it all up, and we're talking about $600 million that may end up in Threshold's hands. The company's market value, as noted, remains below $200 million. Said another way, Merck KGaA may shell out 10 times as much cash to Threshold as Threshold was worth just last week.

Risks to Consider: This is surely a "best-case scenario," and Threshold still has much to prove with TH-302. The drug still has yet to enter Phase III clinical trials, which are the toughest hurdle yet.

Action to Take --> It's usually unwise to buy into a stock AFTER it has had a big run. But in the case of Threshold Pharma, shares were so undervalued to begin with that they still have significant potential, perhaps 100% or more from current levels.

-- David Sterman

David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Sterman
Up 150% in 4 Months, This Stock Could Double Again

4 Things Investors Need to Consider Ahead of Facebook's IPO

Andy Obermueller — Tue, 07 Feb 2012 08:30:00 -0500

While the mainstream financial media chases every conceivable Facebook angle ahead of its initial public offering (IPO), which is expected sometime in May, it's important not to get lost in the frenzy.

About $5 billion worth of shares will be sold, though the deal values the entire enterprise at between $75 billion and $100 billion. Only a little more than two dozen U.S. companies have a market cap that size. Remember, all stock trades are ultimately a matter of valuation, and valuation is always a matter of perspective.

Perspective almost always needs to be checked; certainly so with the level of hype that is surrounding this IPO.

So is Facebook's underlying business worth owning?

To figure this out, I recommend keeping several things in mind...

1. You should be interested in "What's next." Facebook is "What's now."
Everyone already has a Facebook account. How much can it grow from here? That's not a rhetorical question: It's a quantifiable one.
Right now, Facebook's business generates revenue of $3.7 billion and nets 26.9%, or $1 billion. The company grew 77.8% from 2007 to 2008. In the next three years, it grew 185%, 154% and 89%, respectively.

The trend is clear: Facebook's growth is waning.

The best comparison here is Google (Nasdaq: GOOG). Google had four strong years of growth in excess of 30%, then growth waned. Facebook is at that point now.

Now, Google, it has to be said, grew into its valuation. It ended 2004 at $192.79 a share and shot up 235% to its current market cap, which works out to 19.6 times earnings. But it is unlikely that Facebook will be able to accomplish the same feat.

To be worth $100 billion in market cap, at 19.6 times earnings, Facebook needs to have $5.1 billion in earnings. At its current net earnings margin of 26.9%, that implies top-line revenue of $19.3 billion, which is 421.3% above 2011 levels. This means Facebook has to double revenue and earnings in 2012, then double it again in 2013, then start to have 30% a year growth. If it does that -- which would be an incredible business feat -- it would be worth the top end of its IPO price range.

After 36 months, Facebook's business has grown, but it would be fairly valued -- without having generated any upside.

2. Myth: Facebook will be something different than it is today.
There is this idea that Facebook is going to be something other than what it is, that the personal information it has on its scads of users somehow makes it more valuable than just the sum of its parts.

I want to be clear: I totally disregard this notion.

Facebook is what it is. It's a social-networking site. It's nothing more than that. Facebook is a business and it must be judged by its business results.

If it had some magical profitability formula up its sleeve, it would have unleashed it long ago and generated the cash it needs that way rather than raising it from investors. Certainly, Facebook is enviably profitable, it can grow in some ways, and it will change over time. I'm not suggesting any of those things is impossible. To the contrary: They are eventually inevitable. But Facebook will always be the company whose mainline business is operating a social-networking site. That's what you own if you buy shares, and investors can't forget that.

3. "The market is initially a voting booth, but over the long term, it is always a scale."
That's an old Warren Buffett line, and I think it's his most important, especially when one considers how long he's been saying it and how long he's been right.

In the short term, the market will cheer a company just for coming to the market. Traders want to see the company take off and its share price rally because that portends a market ready to buy. That's always good for people who make their living by trading or appearing on TV.

Wall Street gets in this gleeful mood -- former Federal Reserve Chairman Alan Greenspan famously called it "irrational exuberance" -- and begins to do the worst thing it can do: It starts to buy its own B.S. And when they start getting sold on their own deal, an IPO takes on an energy that is completely disconnected from reality.

You see, the market at a certain point stops thinking about anything but results. The idea that a stock price can only move skyward just evaporates. When it eventually does, a company's value will always be compared to its ability to generate cash earnings.

So take a careful look at what Facebook actually makes, at what it earns, and ask yourself what you'd pay to own a piece of that business. At 30% growth a year through the end of 2014, Facebook would have $8.1 billion in revenue and earn $2.2 billion. That level of growth would thrill any reasonable business owner. But at 19.6 times earnings, it means Facebook is worth $43 billion, or 57% less than the top end of its offering price.

4. Assume a Reed Hastings moment.
Everyone likes to talk about what a genius Mark Zuckerberg is. He well may be. But even the greatest tech visionaries make mistakes, and they can be very costly.

Assume the best-case scenario, which is where online movie rental outfit Netflix (Nasdaq: NFLX) found itself. Investors had been lulled by consistently good numbers, profitability and sunny outlooks. Then, reality intervened. A mistake was made. And Wall Street remembered that the genius at the helm is fallible, that the company isn't bulletproof, and that all the gains priced into a coveted stock can be erased in the blink of an eye.

This is a Reed Hastings moment.
Hastings is the CEO of Netflix, and he tried to reorganize his company, rebrand it and also raise its prices. It was too much: Subscribers bolted. And shares of Netflix, one of the Internet's great stock-market success stories, tumbled from $300 in July 2011 to about $62 six months later. Now, the good news is that the shares have come back -- they're up more than 100% from their low. But will they gain another $180 a share and retake the heights they once held? Not a chance. Those gains are gone forever. Netflix came back to a diminished reality.

It has to be assumed that the same could happen to Facebook.

Action to Take --> So, after all that, what do I think of the IPO? I think it is a bad long-term investment. I think Zuckerberg wants to sell at a point when it looks like he can grow forever, even though Facebook cannot possibly sustain its rate of growth and in fact is already seeing growth wane. I will be sitting out this IPO. In future issues, I will follow these shares and assess strategies that investors can use to profit from a long-term bleed-out in Facebook's valuation.

--Andy Obermueller

Andy Obermueller does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of GOOG in one or more if its “real money” portfolios.

This article originally appeared on StreetAuthority
Author: Andy Obermueller
4 Things Investors Need to Consider Ahead of Facebook's IPO

Short Sellers Think this Stock Could go to ZERO

David Sterman — Mon, 06 Feb 2012 13:00:00 -0500

For companies that carry a huge load of debt, there is no room for error. Cash-flow targets need to be met simply to assure investors that funds will be in place to meet future bond redemptions. If that fails to happen, then look out below...

For mattress maker Sealy (NYSE: ZZ), a recently-released quarterly report has highlighted that business simply stinks. As short-sellers see it, the company's debt burden may eventually push this company into bankruptcy.

Short sellers have been targeting Sealy for nearly a year. And though they've scored gains already, they're sticking around because they see even more downside. The number of shares held short rose by 300,000 to 13.3 million shares from the end of December to the middle of January. That's had a crushing effect on the stock, as you can see from the chart below.

Chances are short interest -- which currently represents a whopping 45 day's worth of daily trading volume -- will rise even higher. That's because Sealy came out with quarterly results on Jan. 18, a few days after the most recent short data were released, that were simply lousy.
Fourth-quarter sales fell roughly 10% from a year earlier to $269 million.

It's not that people are buying fewer mattresses. It's just that they prefer to buy mattresses from Sealy's rivals. For example, Mattress Firm Holding Corp. (Nasdaq: MFRM) is expected to boost sales 25% this year (to $860 million), while Tempur Pedic (NYSE: TPX) is expecting sales growth of at least 10% (to $1.8 billion). Analysts at Hilliard Lyons say Sealy's sales will actually fall around 3% this year to $1.2 billion.

To preserve cash, Sealy intends to reduce spending on advertising and marketing. That may not be wise while rivals are spending heavily to gain consumer attention. And Sealy may not even show gains from that cutback because the rising price of raw materials is expected to pressure margins in coming quarters.

Simply put, Sealy can't afford a sales slump. The just-released fourth-quarter results show what happens when the sales base falls by 10%. Gross profit fell 75% to $24 million. Operating income fell by more than 80% to around $4 million. And a year-ago $0.03 a share profit became a $0.14 loss per share this time around. (Analysts had been expecting a $0.01 a share profit.)

Here's where things get really tough. That $4 million in operating income wasn't nearly enough to cover the $15 million quarterly cash interest expense. In effect, Sealy needs to generate at least $60 million a year just to cover its debt interest costs. That seems quite unlikely based on current run rates.

Even if Sealy somehow managed to hike operating income up to that level, it still wouldn't be building up any cash reserves to meet the company's debts that are coming due in a few years. Right now, Sealy has $108 million in cash and almost $800 million in long-term debt.

Reworking the debt
Back in the spring of 2009, Sealy was wise enough to restructure its debt load. Had it not done so, the company may have already been forced into bankruptcy by now, as then in-place debt covenants would have been breached. Instead, Sealy doesn't face any near-term debt repayments, and instead has until May of 2013 to come up with $100 million. (Another $350 million comes due in May 2016.)

Might Sealy look again to extend its debt to avoid trouble when May 2013 rolls around? Well, the weak recent financial results make it that much harder. Lenders would want to see much stronger cash flow before committing to any fresh debt that replaces the $100 million loan due next year, so Sealy needs to start showing much better financial results -- ASAP.

Even if Sealy can line up fresh funding, then the interest rate would likely be quite high, due to the company's risky financial profile. Short sellers are betting it won't even get to that point, and protection from creditors in bankruptcy court is the more likely outcome.

Risks to Consider: If the U.S. economy grows materially stronger this year, all mattress makers -- including Sealy could see sales come in ahead of current forecasts. That would likely give Sealy more wiggle room in its discussions to roll over its debt. Also, heavily-shorted stocks can be subject to a short squeeze, which can quickly push up a stock as an up-tick in shares leads to a big rally as short sellers seek to cover their positions.

Action to Take --> Kohlberg Kravis & Roberts (NYSE: KKR), a private equity group, took Sealy private in 2004, loaded it up with debt, and then brought it public again in 2006. That proved to be a bad move, and the massive debt burden is slowly choking this company. Coming quarterly results are likely to bring the debt concerns into even sharper focus as cash flow remains sub-par. Short sellers appear to have a solid case, and you can profit by also shorting this stock.

-- David Sterman

David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: David Sterman
Short Sellers Think this Stock Could go to ZERO

Learn from Buffett -- and Buy Shares of this International Monopoly

Lisa Springer — Mon, 06 Feb 2012 11:30:00 -0500

If you want to follow the lead of one of the world's great investors, then Warren Buffett should be your role model. Since taking control of Berkshire Hathaway (NYSE: BRK-B) 48 years ago, Buffett has delivered 20% average annual returns to investors time and again.

Buffett is so successful because he only invests in companies that have a wide "economic moat," or an advantage that allows them to consistently stay ahead of the competition. Companies can build an economic moat by having industry-leading market share, being a low-cost producer, having proprietary products or by making customer switching costs prohibitively high.

Mexican airport-management firm Grupo Aeroportuario del Cento Norte (Nasdaq: OMAB) is a great example of such a company. Grupo Aero is the sole supplier of services to 13 regional airports in central and northern Mexican states, which are operated as state-awarded monopolies.

Grupo Aero is mainly a play on Mexico's internal growth, since only three of the country's airports -- Mazatlan, Acapulco and Zihuatanejo -- serve major tourist destinations. And Mexicans are traveling more than ever as a result of the country's improving economy.

Mexico's economic recovery is mainly tied to rising exports and growing foreign investment by companies that want to take advantage of Mexico's low inflation and labor costs. Its economy grew 4% last year, on top of 5% growth the previous year, outperforming the world's developed economies. The International Monetary Fund forecasts Mexico's economy to grow 3.5% this year, which is much higher than the 2% growth projected for the U.S. economy and the 0.5% contraction expected for the euro zone.

Grupo Aero has management contracts that run through 2048 on all 13 airports it serves -- exactly the kind of long-term certainty Buffett looks for in an investment. The company operates airports serving Monterrey -- the country's third-largest city -- and popular tourist destinations such as Mazatlan and Acapulco. Nearly 12 million passengers traveled through its airports during 2011. In addition, domestic terminal passenger traffic was up 3.4% in 2011 compared with 2010, reflecting 23 new domestic routes added by the eight carriers serving its airports in the past 18 months.

Grupo Aero generates nearly 70% of its revenue from per-passenger take-off and landing fees, and the remainder (reported as non-aeronautical service revenue) from parking fees, restaurants and retail concessions. This means Grupo Aero is essentially a toll collector -- the more passengers fly in and out of its airports (and the more money they spend in the airports), the more Grupo Aero makes.

Solid numbers and projections
Grupo Aero's revenue improved 4.4% to about $157.4 million during the first nine months of 2011 compared with a year earlier, as a result of increased traffic, higher airline tariffs and a 20.2% surge in non-aeronautical revenue, which totaled roughly $33.2 million.

Analysts say Grupo Aero can deliver earnings growth of 14% in 2012 and 22% in 2013. A stronger U.S. economy would also help the company by increasing travel to Mexico. While overall passenger traffic through Grupo Aero airports was up in 2011, international traffic was down 7.4% from the prior year at 1.8 million. A return of international traffic to pre-recession levels would boost passenger tariffs and income even more.

Grupo Aero recently opened a new terminal at the Monterrey airport and a 287-room hotel inside Terminal 2 at the Mexico City International airport. The company also plans to invest about $214.3 million in upgrades and expansions of its terminals and improvements to its runways during the next three years. These investments should help Grupo Aero attract even more passenger traffic and retail businesses for its terminals.

The dividend
Grupo Aero generated nearly $36.6 million of cash flow in the first nine months of 2011, which was more than enough to cover $23.3 million of dividend payments.

Dividends are also supported by a strong balance sheet. Grupo Aero has cash of nearly $44.5 million, long-term debt of $117.4 million and just 20% of capitalization.

Grupo Aero has a six-year record of dividend payments and pays quarterly. The $0.52 annual dividend yields 3.5% currently and has yielded 4.1% on average in the past five years. Although Grupo Aero hasn't raised the dividend since 2008, payout has gradually declined from 115% to 60% of earnings, which creates room for dividend growth.

Such robust fundamentals are reflected in the company's excellent debt rating -- "AA+" -- from Standard & Poor's and Fitch Ratings. Another source of financial strength for Grupo Aero is a 16% equity investment by SETA, which is jointly owned by Aeroports de Paris, the second-largest European airport operator; and ICA, Mexico's largest engineering, procurement and construction company.

Shares of Grupo Aero had gained 112% in the past three years, but when the S&P 500 dipped in July 2011, the stock fell 33%. Shares have since recovered by about 23%, and now trade above $15.

Risks to consider: There is some currency risk to this stock, since dividends are paid in pesos, as well as a 10% withholding tax on dividends paid to U.S. investors. But investors can recover the tax by claiming a foreign tax credit on their annual IRS tax filing. Highly-publicized drug violence in Mexico is also a concern, since it may deter tourism and slow growth in international traffic through Grupo Aero's airports.

Action to take --> If, like Buffett, you prefer investments that have a wide economic moat, then I recommend holding Grupo Aero. The company's monopoly on airport services supports the strong dividend, and it's poised for improving earnings growth because of Mexico's economic recovery, which should help boost the share price going forward.

Lisa Springer

Lisa Springer does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.

This article originally appeared on StreetAuthority
Author: Lisa Springer
Learn from Buffett -- and Buy Shares of this International Monopoly

Why Wall Street Experts are Getting Nervous about this Rising Market

David Sterman — Mon, 06 Feb 2012 10:00:00 -0500

At the start of each year, the chief strategists at Wall Street firms analyze dozens of variables and make bold prognostications for the year ahead. They distill all of their conclusions into one simple number -- the S&P 500, and where it will reside one year hence.

As these strategists were putting their forecasts together, they surely noted that the S&P 500 was marching nicely higher. Trouble is, it keeps moving up and is starting to already breach the more conservative forecasters on the Street.

More than a few of these folks predicted the S&P 500 would end the year around 1,325. We've already surpassed that mark, and we've got 11 months to go! To be sure, other folks see a brighter finish. Here's a small sample of key market strategists, along with their year-end forecasts for the S&P 500.

Wells Fargo (NYSE: WFC)
December 2012 S&P 500 target: 1,325
This forecast was issued in early December 2011, and has already gotten one factor wrong. "Stocks seem destined to start the year troubled by ongoing sovereign debt struggles in Europe, waiting for another jolt from policymakers," was their off-the-mark prediction. To be fair, many investors had been waiting for another shoe to drop from Europe. And who knows, it still may happen.

Meanwhile, that cautious backdrop has possibly helped, as stocks have "climbed a wall of worry." In effect, most rallies only come when a group of investors takes a bearish view and stocks get underpriced as those worries filter in. Worries about Europe have receded, which counter-intuitively, is a bearish sign because there is no wall to climb.

How did Wells Fargo arrive at that 1,325 S&P 500 target? They expected aggregated profits for all 500 companies in the index would rise 4% this year, and suggested that an environment of low inflation and low rates warranted a target P/E of 13 times earnings.

Wells Fargo's strategists say much will hinge on how Washington responds to the current budget problems. "The uncertain outlook for fiscal policy seems likely to continue to dampen confidence and create uncertainty for investors. In our view, the first concerted effort to cut the path of U.S. fiscal spending will be greeted with a sigh of relief," they note.

Curiously, as the battle for the Republican Party's Presidential nomination unfolds, budget pressures have fallen from the headlines -- and investor's consciousness. How long will that last?

Goldman Sachs (NYSE: GS)
December 2012 S&P 500 target: 1,250
This is a sobering forecast, implying the market has peaked and will actually head lower. Based on all of the global headwinds in place, Goldman's strategists say a price-to-earnings (P/E) ratio of around 11.8 times 2012 profits is the right multiple. And they derive that forecast with the assumption that the United States has tepid economic growth and Europe slips into a mild recession. But they caution that "in the event of a harsher global recession scenario we forecast far more significant downside."

How does 900 for the S&P 500 sound? Not good. That's where Goldman says the S&P 500 will end up in a worst-case scenario.

Merrill Lynch
December 2012 S&P 500 target: 1,350
This is another cautionary price target. Merrill actually predicted stocks would start the year on a solid note, but suggested investors shouldn't get complacent. "In the short term, we expect the New Year rally in risk assets to continue." Although analysts acknowledge that the still-unresolved European crisis may be seen as a drag, they still thought it prudent to "swim against the tide early in 2012 by betting on upside rather than downside, driven by bearish investor positioning and U.S. growth upgrades. A grind higher in stock prices remains plausible but we recommend taking profits if equity markets move toward our year-end targets of 1350 for the S&P 500."

UBS
December 2012 S&P 500 target: 1,325
Seeing a pattern emerge? This is another outlook that would suggest it's already time for profit-taking, predicting "2012 should again be a struggle between stronger domestic fundamentals and macro risks." Clearly, such macro risks aren't in evidence right now. Indeed, as of the very latest snapshot, it appears that Greece will strike a deal with creditors and avoid (or at least forestall) catastrophe.

The UBS forecasters raise another concern, and I am in complete agreement on this one. They predict "equities will struggle in the face of the European recession currently being forecast by UBS economists."

Conclusions...
While I am churlishly piling on these strategists for their cautious stance, I too have been a bit wary of this rally. I still think that European recessions, and not the currency crisis, hold the real threat to profits and stocks.

After watching the S&P 500 run from 1,160 in late November to 1,280 in mid-January, I grew nervous about what Europe will look like AFTER the debt/currency crisis is addressed. Addressing the weakest countries, I suggested that "it's hard to see how these lagging economies can avoid an even deeper economic retrenchment -- one which makes it hard to make a dent in debt burdens. And if that's the case, then continent-wide economic expansion will also grind lower."

Well, the S&P 500 has risen another 2% since then. That's likely attributable to continuing positive economic signs. Just this past week, we saw bullish reports on jobs, manufacturing and construction spending. Then again, fourth-quarter earnings have just been OK, and have not delivered the stellar upside we'd seen in recent quarters. For this rally to sustain throughout the year, quarterly profits -- and the U.S. economy -- will need to keep getting healthier.

Action to Take --> If you own any recent big gainers, then no one could blame you for taking profits. Short rallies should always be seen as an opportunity to raise cash so you have the funds to invest the next time the market pulls back.

-- David Sterman

David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of FWF in one or more if its “real money” portfolios.

This article originally appeared on StreetAuthority
Author: David Sterman
Why Wall Street Experts are Getting Nervous about this Rising Market

Your Most Important Investing Decision of the Next 10 Years

Carla Pasternak — Mon, 06 Feb 2012 08:30:00 -0500

Think of where you'd be right now if you'd made this move 10 years ago.

The S&P 500 is up only 41% during that time (a 3.5% average annual gain). Meanwhile, Reynolds American (NYSE: RAI) is up 403% during the same span. Energy Transfer Partners (NYSE: ETP) has returned 664%. Entertainment Properties Trust (NYSE: EPR) is showing a return of 356%.

And these are some of the most boring companies you can think of -- real-state investment trusts (REITs), pipeline operators and cigarette makers. But they all have one thing in common.

They pay solid dividends.

As the chief investment strategist behind High-Yield Investing, I'm biased. But I think dividends are the most powerful tool in investing. You don't have to take my word for it. Other investors agree:

"I have made more money in retirement than I did when I was working. Income from dividend-paying stocks (which I collect every month) is even better than my greatest expectations."

- High-Yield Investing subscriber, William B.

Even John D. Rockefeller once quipped that the only thing that gave him pleasure was to see his dividend coming in.

The simple fact is that how you treat the dividend -- often the forgotten step-child among investors -- is the most important investing decision you'll make today... in the next year... even the next decade.

Let me show you what I mean.

Take two portfolios, each worth $100,000. The first one earns 8% in capital gains each year. The second one earns half that amount in capital gains -- only 4% each year -- but earns a 6% dividend that's reinvested.

I chose these numbers as they illustrate a choice investors can be faced with -- invest in a faster-growing stock that doesn't pay a cent in dividends, or earn a nice yield and see slower growth. Here's the best news -- you'll end up earning more with the dividend, and typically have fewer ups and downs as you would with a riskier growth stock.

In fact, in 10 years your portfolio would be worth $265,089 if you went with the dividend-paying holdings, compared with $215,892 with the growth-only portfolio.

During a longer period, the difference is more dramatic.

Wait 20 years and your dividend portfolio would be worth more than $702,000 compared with $466,096 -- a difference of more than $200,000.

And here's the best part. The misconception is that dividend payers are boring, stodgy securities. They might pay a few percent, but they won't grow enough to really make a difference.

That couldn't be further from the truth...

• Shares of Sun Communities (NYSE: SUI) yield 6.1%, but they've returned 623% since the March 2009 market low.

• During the same time, the Reaves Utility Income Fund (AMEX: UTG) has returned 364%, while paying monthly dividends that now equal a 5.5% yield.

• And the Nuveen Real Estate Income Fund (AMEX: JRS) has returned 459% in addition to its 8.2% yield.

But that's during a strong market rally, and coming off of multi-year lows. What about in different conditions?

• Terra Nitrogen (NYSE: TNH) is paying 7.1% and has a total of return of 100% during the past year (a time when the S&P 500 is up only 4%).

• Altria (NYSE: MO), which pays a 5.8% dividend yield, has returned 28% in the past year.

That's not to say every dividend payer will be a big winner. It won't be, and I wouldn't listen to anyone who says they can guarantee a stock's gains.

Action to Take --> But in the sizzle of the mainstream financial media, it's the fast-moving names like Apple (Nasdaq: AAPL) and Google (Nasdaq: GOOG) that get most of the headlines. As you can see, it may just be the dividend-payers that are most important to your success.

-- Carla Pasternak

Carla Pasternak does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC owns shares of SUI, GOOG in one or more if its “real money” portfolios.

This article originally appeared on StreetAuthority
Author: Carla Pasternak
Your Most Important Investing Decision of the Next 10 Years